Global political shocks shift global trade

As China seeks to exploit an unprecedented series of political shocks to the major western nations, trade policy has emerged as the key battleground on which the balance of global economic power will be fought out.

And in the wake of the shocks delivered by the Brexit vote and the outcome of the US presidential election, the first test of strength in this global power struggle is under way, with a decision to be taken within days about whether China should be granted equivalence with the major western economies within the World Trade Organization (WTO).

A December 11 deadline for WTO members to decide whether to change China’s status from “developing economy” to “market economy” is being preceded by intense lobbying by key Western governments and industries to delay such a change.

There are widespread concerns – especially in Europe and the United States – that allowing China “free market status” would pose a grave threat to a wide range of domestic manufacturing industries that could face sharply increased price competition from Chinese competitors.

The Obama administration decided a few days ago to oppose changing China’s status – a decision with which President-elect Trump concurs, not surprisingly given that he has talked about imposing a 45 per cent tariff on all Chinese imports which he claims is necessary to redress the “unfair” cheap prices of Chinese imports.

A resurgence of protectionist pressures would also be bad news for Britain and its post-Brexit trade ambitions … Trade experts are warning that, in the changing global scene, Britain might struggle to find willing FTA partners

The European Commission has proposed an alternative to granting China market economy status with a complicated new formula for assessing so-called “fair prices” for Chinese goods in international markets.

It is not clear yet, however, what the EU’s final position will be, with the European Parliament lobbying hard against upgrading China’s WTO status to “free market”.

The issue has arisen because, under the terms on which China was granted membership of the WTO in 2001, a 15-year deadline was set for it to be granted free market status, conditional on internal, market-based reforms in China. China insists that it has met its obligations and that the rest of the WTO membership should respect this and meet its obligations to China.

The issue is important because, once China is granted free market status, WTO provisions that currently allow other countries to impose anti-dumping duties on Chinese products will be dramatically weakened.

This is because assessing the fair market value of Chinese export goods would change from measuring prices against high production costs in Europe to measuring them against domestic production costs in China. Because China has much lower production costs than Europe, the duties that could be imposed on Chinese imports to Europe (and elsewhere) would be much lower than they are now.

The European steel industry, which employs nearly 330,000 people, is leading the campaign by European industries to oppose this change.

While Europe and the US fear for jobs, China argues that it deserves to be ranked as a market economy because of the extraordinary transformation that the Chinese economy has undergone in the 15 years since it joined the WTO.

The decision about China’s status within the WTO is symptomatic of the much bigger and wider question of what will happen to the balance of global trade as the US turns sharply inward and, under President-elect Trump, sharply more protectionist.

In the wider Western sphere, there is deep alarm at the prospects of the US ceasing to lead the world in fighting for freer trade and lower barriers to global trade and commerce.

There is also sudden alarm at the wider strategic consequences of this change, with concern growing that this will see China strongly assert itself to fill any void created by the Trump administration’s retreat from US leadership.

… Some experts [warn] that the only multi-lateral free trade agreement which appears likely to gain any momentum is the one in which China is lead power – the Regional Comprehensive Economic Partnership (RCEP)

At the regional level – in Europe in particular – the fallout from such tectonic shifts could be growing protectionist pressures generated by fear of the impact of Chinese economic and trade power on European industries and manufacturing jobs.

A resurgence of protectionist pressures would also be bad news for Britain and its post-Brexit trade ambitions. Prime Minister Theresa May has said post-Brexit Britain wants to be a global leader in promoting lower protection by signing a host of free trade agreements.

In this new, more fearful global trade environment, some experts are warning that the only multi-lateral free trade agreement which appears likely to gain any momentum is the one in which China is lead power – the Regional Comprehensive Economic Partnership (RCEP).

With TPP and the TTIP (see below) apparently close to death with the collapse of American leadership, the RCEP – which includes most of the trading nations of East and Southeast Asia – is now being promoted by China as the best hope for restoring momentum to the reduction of barriers to international trade and investment.

The accompanying table to this article sets out the increasingly bleak picture for multilateral trade agreements.

“Everything else is either stalled, moribund or going backwards,” a senior Australian government trade official told Chief-Exec.com.

“China sees this as potentially a great opportunity to show leadership and gain advantage over the US. If the US does shift towards isolationism, it is very likely that a lot of countries will turn towards China because of its rapidly growing economic power.

“The world could look very different after a few years of the Trump presidency.”

List of major multilateral free trade agreements
(existing and proposed)

China has been increasingly asserting a leadership role in RCEP and promoting it as an alternative to the Trans Pacific Partnership. Intensifying these efforts in light of President-elect Trump’s decision to withdraw the US from TPP. RCEP now seen as a potential vehicle for major increase in China’s influence in world trade and strategic influence in the Asia-Pacific.

TPP (Trans Pacific Partnership)

Negotiations commenced January 2008. Agreement signed in February, 2016.

Goal:

To remove barriers to trade in all markets and to introduce rules for liberalising intellectual property rights.

Negotiations conducted in secret.

Current status:

President elect Trump has declared he will withdraw US from the deal on day one of his presidency (January 20, 2017). Future of TPP uncertain.

TTIP (Trans Atlantic Trade and Investment Agreement)

A proposed free trade area covering the European Union and the United States, estimated to be worth 120 billion euros to the EU and 90 billion to the US, an estimated 50 per cent increase in total EU-US trade

Negotiations commenced February 2013.

Goal:

To increase market access, to streamline regulations and to provide clear rules to allow greater sharing of intellectual property.

Negotiations conducted in secret.

Current status:

Negotiations are proceeding, but amid intense public opposition. President-elect Trump has signalled he will kill TTIP.

EU-China investment agreement

To cover economic relations between China and all EU countries, estimated to be worth one billion euros a day in trade, investment and other service industries such as tourism and education (China is now the EU’s biggest trading partner).

Negotiations commenced in January 2014.

Goal:

To remove barriers and to establish clear rules for facilitating a deeper economic relationship and to lay foundations for a full bilateral free trade agreement.

Current status:

Negotiations on an investment agreement are continuing. Once completed, negotiations on a full FTA are expected to commence.

NAFTA (North American Free Trade Agreement)

An agreement between the United States, Canada and Mexico.

Came into force in 1994, amid predictions of huge economic benefits for all three countries.

Goal:

To eliminate barriers to trade and investment in the north American nations.

Current status:

Generally seen as having delivered less than promised. Blamed in the US for allowing the exporting of American manufacturing jobs to Mexico. Criticised in Canada for giving big American corporations excessive powers.

President-elect Trump has called it “a disaster for the United States”. Future uncertain.

CETA (Comprehensive Economic and Trade Agreement)

A free trade agreement between the European Union and Canada.

Goal:

To remove 98 per cent of trade barriers between the EU and Canada.

EU claims it will lead to savings of over half a billion euros a year in taxes on exports to Canada plus greatly increased market access for both countries.

Negotiations commenced in May, 2009. The deal was signed by Canada in October, 2016. It now has to be ratified by all EU member states.

Current status:

Will come into operation once EU ratification process in completed.

Strong opposition to CETA is on-going, based on criticism that it weakens European consumer rights and only benefits big business.

Still possible that CETA will fail to be ratified by an EU state, effectively killing it.

European Economic Area Agreement

An access to the single market agreement involving 28 EU members states and three non-EU countries (Norway, Iceland and Liechtenstein).

Came into effect in 1994.

Goal:

To allow countries neighbouring the EU to trade and gain access to the benefits of the single market without becoming full EU members.

Current status:

Allows the free movement of goods, services, capital and people between the European single market and the non-EU states.

Seen by the Brexit forces in the United Kingdom as the model for a similar agreement between the UK and the EU post-Brexit. But EU has made it clear access to the single market can only be on the basis that it also includes free movement of people.

Other free trade agreements

There are 23 other smaller multilateral and bilateral free trade agreements now in operation.

News Bites

May to hold talks with Merkel in Berlin
Theresa May is due to hold talks with German Chancellor Angela Merkel as she seeks to make progress on negotiating Brexit. The PM will travel to Berlin for the meeting at the Chancellery. It comes a day ahead of a speech on Saturday in which she is expected to set out the “security partnership” she wants to maintain with the EU. The UK is under pressure to reveal more detail about the final relationship it wants with the EU. Mrs May and her ministers are setting out what has been dubbed “the road to Brexit” in a series of speeches. BBC news, February 16

UK aims to keep financial rules close to EU
The UK is ready to set out its vision for how it wants financial services to operate after Brexit and favours an ambitious “mutual recognition” of regulations to preserve the City of London’s access to the EU. Under Britain’s proposal, the UK and the EU would recognise each other’s regulatory and supervisory regimes and would have aligned rules at the point of Brexit, with a mechanism that would monitor any divergence. Three senior figures briefed on Brexit discussions in the cabinet said that the government will back the proposal, which is also favoured by Mark Carney, the Bank of England governor. Financial Times, February 16

Business leader warns May against harsh immigration policy
British companies are facing a recruitment crisis, with labour shortages hitting critical levels in some sectors, according to a business leader who has urged the government to produce details on a post-Brexit immigration system. Adam Marshall, the director general of the British Chambers of Commerce, said the lack of candidates for some jobs was biting hard, and he warned ministers against bringing forward a “draconian and damaging” visa or work permit system. Surveys by the BCC showed that nearly three-quarters of firms trying to recruit had been experiencing difficulties “at or near the highest levels since [BCC] records began over 25 years ago”, he said. The Guardian, February 16

Lecturers want ‘radical’ tuition fee review
University staff are calling for a “radical” overhaul of tuition fees and higher education funding in England in a review of student finance. Sally Hunt, leader of the University and College Union, says the review must be more than “tinkering at the edges”. The review, expected to be formally announced in the near future, follows a promise by the prime minister to examine the cost of university. Theresa May said the review would show “we have listened and we have learned”. Ms Hunt, whose members are threatening strike action next week in a pensions dispute, says there needs to be a “fundamental look at university funding”. BBC news, February 16

Shampoo ‘as bad a health risk as car fumes’
Shampoo, oven cleaner, deodorant and other household products are as significant a source of the most dangerous form of air pollution as cars, research has found. Scientists studying air pollution in Los Angeles found that up to half of particles known as volatile organic compounds (VOCs) came from domestic products, which also include paint, pesticides, bleach and perfumes. These compounds degrade into particles known as PM2.5, which cause respiratory problems and are implicated in 29,000 premature deaths each year in the UK. Traffic had been assumed to be the biggest source of air pollution. The new findings, published in the journal Science, led to warnings that countries may struggle to hit pollution targets, with most tackling vehicle emissions. The Times, February 16

US rejects China bid for Chicago Stock Exchange
The US has rejected a proposed merger between the Chicago Stock Exchange and a Chinese-linked investor group. The decision comes after more than two years of reviews by officials. The tie-up was initially approved by the Committee on Foreign Investment in the United States, pending further approval by the Securities and Exchange Commission (SEC). But US politicians, including President Trump, have said letting a Chinese firm invest in a US exchange was a bad idea. Under the proposal, the Chinese-led North America Casin Holdings group would have bought a minority share of the privately owned Chicago Stock Exchange. BBC news, February 16

Labour gets 16,000 emails in five days urging it to consult on Brexit
More than 16,000 people have emailed Labour over the past five days, urging the party to consult members on Brexit after MPs said the topic was being ignored by its most senior policy body. The emails from party members will be examined by the party’s national policy forum (NPF), which meets this weekend in Leeds, and whose members include the shadow cabinet and trade union leaders. Labour has set up eight policy commissions since last year’s general election, to consult members and develop policy, but none focus on Brexit. The party has said Brexit is covered under the international policy commission, involving Keir Starmer, the shadow Brexit secretary, but that commission is not at the moment accepting submissions on Brexit. The Guardian, February 15